Adkisson's

Uniform Protected Series Act

(UPSA)

Caution State Law Variances!

 SECTION 401. LIMITATIONS ON LIABILITY.

(a) A person is not liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of:

(1) a protected series of a series limited liability company solely by reason of being or acting as:

(A) an associated member, series manager, or protected-series transferee of the protected series; or

(B) a member, manager, or a transferee of the company; or

 

Reporter's Comment to Subsection (a)(1) – This provision establishes the traditional, vertical liability shield to protect associated members, series managers, and protected transferees of a protected series of a of a series limited liability company against status-based liability for a debt, obligation, or other liability of the protected series or of the company and is based on Uniform Limited Liability Company Act (2006) (Last Amended 2013), Section 304(a). The shield is effective only against status-based liability – i.e., where the liability is asserted solely by reason of a person's status (e.g., associated member, series manager). The shield does not protect against direct liability for tortious conduct. For a detailed discussion of this issue, see Uniform Limited Liability Company Act (2006) (Last Amended 2013), Section 304(a), cmt., Shield Inapposite for Claims Arising from a Member's or Manager's Own Conduct.

 

The protection accorded a protected-series transferee also extends to the series limited liability company. See Section 303(d) (providing that, ("[i]f a series limited liability company owns a protected-series transferable interest of a protected series of the company, a provision of this ACT… which applies to a protected-series transferee of the protected series applies to the company in its capacity as an owner of the protected-series transferable interest").

 

(2) a series limited liability company solely by reason of being or acting as an associated member, protected-series manager, or protected-series transferee of a protected series of the company.

 

Reporter's Comment to Subsection (a)(2) – This provision is shorter than subsection (a)(1), because an enacting state's limited liability company act addresses most of the roles protected by a company's vertical shield – e.g., a member not in the capacity of an associated member of a protected series.

 

JayNote: Paragraph A of § 401 utterly rejects pure status-based liability arising from either the series organization or a protected series through the use of the language "solely by reason of being or acting", with emphasis on "solely". But the use of "solely" also connotes that if there are additional facts that may give rise to liability, then status may be taken into account in determining if the liability exists.

 

Example: Shortly after signing on as a member and manager of Alpha Protected Series LLC, and all of its protected series nos. 1-999, John is involved in an accident and is hospitalized in a coma. While John is in the coma, never having been disassociated as a member of manager, Alpha is taken over by a con artist who misuses the structure as a Ponzi scheme causing massive losses to investors. Under § 401(a), John can have no liability to investors, since the liability would be predicated solely by reason of John being or acting as a member or manager.

 

Example: While Alpha Protected Series LLC is being misused as a Ponzi scheme, Jerry as a manager of the series organization (but not of any protected series) has repeated opportunities to review financial statements that show financial abuse, but is too busy to bother with them. Notwithstanding § 401(a), Jerry can be liable to investors for negligence occasioned by his failure to examine the financial statements and catch the fraud.

 

(b) Subject to Section 404, the following rules apply:

(1) A debt, obligation, or other liability of a series limited liability company is solely the debt, obligation, or liability of the company.

(2) A debt, obligation, or other liability of a protected series is solely the debt, obligation, or liability of the protected series.

 

JayNote: Section 404(b) creates the so-called "internal shields" of a protected series LLC. In short, the liabilities of each protected series and the series organization are self-contained within those entities and are not shared with others.

 

Example: Beta Protected Series LLC has ten protected series (1-10), each of which consists of separate tractor dealerships. Protected Series #4 knowingly sells a defective tractor, causing the farmer's death and ensuing negligence action. Only Protected Series #4 can be liable to the farmer's estate, and not the series organization or any of the other series.

 

But what if, in the above example, a huge judgment is rendered against Protected Series #4 in excess of its insurance coverage and assets? Outside of bankruptcy, the farmer's estate cannot collect more than Protected Series #4's insurance coverage and assets. The question to which the answer is unknown and can only be speculated is whether Protected Series #4 can independently obtain bankruptcy protection without implicating the series organization and the other series in the bankruptcy. This is why, if the insolvency of a protected series is even just reasonably possible, it is probably better to form separate LLCs than to attempt to use a protected series under the UPSA (or any other state Series LLC Act).

 

(3) A series limited liability company is not liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of a protected series of the company solely by reason of the protected series being a protected series of the company or the company:

(A) being or acting as a protected-series manager of the protected series;

(B) having the protected series manage the company; or

(C) owning a protected-series transferable interest of the protected series.

(4) A protected series of a series limited liability company is not liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the company or another protected series of the company solely by reason of:

(A) being a protected series of the company;

(B) being or acting as a manager of the company or a protected-series manager of another protected series of the company; or

(C) having the company or another protected series of the company be or act as a protected-series manager of the protected series.

 

Reporter's Comment to Subsection (b) – This provision establishes the novel, horizontal shields, which are explained in detail in Prefatory Note, Part 7. The provision is subject to Section 404, because the "asset by asset" exposure under that section interferes with the non-recourse aspect of the horizontal shields.

 

Reporter's Comment to Section 401 - This section provides two different types of liability shields:

 

  • the traditional, vertical shields that protect equity holders and managers from status-based liability for an organization's obligations – i.e., where liability is asserted solely by reason of the status of owner or manager, Subsection (a); and

 

  • the novel, horizontal shields that protect a protected series of a series limited liability company from liability for the debts, obligations, or other liabilities of the company or another protected series of the company (and provide comparable protection for the company itself), Subsection (b).

 

For further explanation, see Prefatory Note, Part 7.

 

For claims to disregard the shields created by this section, see Section 402.

 

JayNote: Section 402(b) provides that the failure to follow the formalities is not a reason to disrespect the liability shields under § 401(a), but may be a reason to disrespect the liability shields under § 401(b).

 

Otherwise, section 401(b)(3) and (4) seem substantially redundant in effect with § 401(a), although ¶ (b)(3) and (4) are stated from the viewpoint of the "innocent" protected series and series organization. Suffice it to say that because the UPSA is a new act in the sense that it did not have a predecessor uniform act for guidance, and that the concept of Series LLCs and even the existing state acts are themselves relatively novel, the Drafting Committee was often here and elsewhere willing to accept possible redundancy for purposes of clarity.

 

 

C O M M O N    P A G E    F O O T E R

UPSA AND WEBSITE CONTENTS

 

ARTICLE 1. GENERAL PROVISIONS

 

          SECTION 101. SHORT TITLE.

 

          SECTION 102. DEFINITIONS.

 

          SECTION 103. NATURE OF PROTECTED SERIES.

 

          SECTION 104. POWERS AND DURATION OF PROTECTED SERIES.

 

          SECTION 105. GOVERNING LAW.

 

          SECTION 106. RELATION OF OPERATING AGREEMENT, THIS ACT, AND LIMITED LIABILITY COMPANY ACT.

 

          SECTION 107. ADDITIONAL LIMITATIONS ON OPERATING AGREEMENT.

 

         SECTION 108. RULES FOR APPLYING LIMITED LIABILITY COMPANY ACT TO SPECIFIED PROVISIONS OF ACT.

 

ARTICLE 2. ESTABLISHING PROTECTED SERIES

 

         SECTION 201. PROTECTED SERIES DESIGNATION; AMENDMENT.

 

          SECTION 202. NAME.

 

          SECTION 203. REGISTERED AGENT.

 

          SECTION 204. SERVICE OF PROCESS, NOTICE, DEMAND, OR OTHER RECORD.

 

          SECTION 205. CERTIFICATE OF GOOD STANDING FOR PROTECTED SERIES.

 

          SECTION 206. INFORMATION REQUIRED IN ANNUAL BIENNIAL REPORT; EFFECT OF FAILURE TO PROVIDE.

 

ARTICLE 3. ASSOCIATED ASSET; ASSOCIATED MEMBER; PROTECTED-SERIES TRANSFERABLE INTEREST; MANAGEMENT; RIGHT OF INFORMATION

 

          SECTION 301. ASSOCIATED ASSET.

 

         SECTION 302. ASSOCIATED MEMBER.

 

          SECTION 303. PROTECTED-SERIES TRANSFERABLE INTEREST.

 

          SECTION 304. MANAGEMENT.

 

          SECTION 305. RIGHT OF PERSON NOT ASSOCIATED MEMBER OF PROTECTED SERIES TO INFORMATION CONCERNING PROTECTED SERIES.

 

ARTICLE 4. LIMITATION ON LIABILITY AND ENFORCEMENT OF CLAIMS

 

          SECTION 401. LIMITATIONS ON LIABILITY.

 

          SECTION 402. CLAIM SEEKING TO DISREGARD LIMITATION OF LIABILITY.

 

          SECTION 403. REMEDIES OF JUDGMENT CREDITOR OF ASSOCIATED MEMBER OR PROTECTED-SERIES TRANSFEREE.

 

          SECTION 404. ENFORCEMENT AGAINST NON-ASSOCIATED ASSET.

 

ARTICLE 5. DISSOLUTION AND WINDING UP OF PROTECTED SERIES

 

          SECTION 501. EVENTS CAUSING DISSOLUTION OF PROTECTED SERIES.

 

          SECTION 502. WINDING UP DISSOLVED PROTECTED SERIES.

 

          SECTION 503. EFFECT OF REINSTATEMENT OF SERIES LIMITED LIABILITY COMPANY OR REVOCATION OF VOLUNTARY DISSOLUTION.

 

ARTICLE 6. ENTITY TRANSACTIONS RESTRICTED

 

          SECTION 601. DEFINITIONS.

 

          SECTION 602. PROTECTED SERIES MAY NOT BE PARTY TO ENTITY TRANSACTION.

 

          SECTION 603. RESTRICTION ON ENTITY TRANSACTION INVOLVING PROTECTED SERIES.

 

          SECTION 604. MERGER AUTHORIZED; PARTIES RESTRICTED.

 

          SECTION 605. PLAN OF MERGER.

 

          SECTION 606. STATEMENT OF MERGER.

 

          SECTION 607. EFFECT OF MERGER.

 

          SECTION 608. APPLICATION OF SECTION 404 AFTER MERGER.

 

ARTICLE 7. FOREIGN PROTECTED SERIES

 

          SECTION 701. GOVERNING LAW.

 

          SECTION 702. NO ATTRIBUTION OF ACTIVITIES CONSTITUTING DOING BUSINESS OR FOR ESTABLISHING JURISDICTION.

 

          SECTION 703. REGISTRATION OF FOREIGN PROTECTED SERIES.

 

          SECTION 704. DISCLOSURE REQUIRED WHEN FOREIGN SERIES LIMITED LIABILITY COMPANY OR FOREIGN PROTECTED SERIES PARTY TO PROCEEDING.

 

ARTICLE 8. MISCELLANEOUS PROVISIONS

 

          SECTION 801. UNIFORMITY OF APPLICATION AND CONSTRUCTION.

 

          SECTION 802. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT.

 

          SECTION 803. TRANSITIONAL PROVISIONS.

 

          SECTION 804. SAVINGS CLAUSE.

 

          SECTION 805. SEVERABILITY CLAUSE.

 

          SECTION 806. REPEALS; CONFORMING AMENDMENTS.

 

          SECTION 807. EFFECTIVE DATE.

 

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THE CHARGING ORDER PRACTICE GUIDE BY JAY ADKISSON

 

The Charging Order Practice Guide: Understanding Judgment Creditor Rights Against LLC Members, by Jay D. Adkisson (2018), published by the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association

Click here for more information

 

Now available for purchase at https://goo.gl/faZzY6

MORE INFORMATIONAL WEBSITES BY JAY ADKISSON

 

  • About Jay Adkisson - More about Jay D. Adkisson, background, books, articles, speaking appearances - https://jayadkisson.com/

 

  • Captive Insurance Companies - Licensed insurance companies formed by the parent organization to handle the insurance and risk management needs of the business, by the author of the book Adkisson's Captive Insurance Companies - https://captiveinsurancecompanies.com/

 

 

  • Collecting On A Judgment - An explanation of common creditor remedies, strategies and tactics to enforce a judgment, including a discussion of common debtor asset protection strategies - https://collectingonajudgment.com/

 

  • Voidable Transactions - Discussion of the Uniform Voidable Transactions Act (a/k/a 2014 Revision of the Uniform Fraudulent Transfers Act) and fraudulent transfer law in general - https://voidabletransactions.com/

 

  • Private Retirement Plans - An exploration of a unique creditor exemption allowed under California law which can be very beneficial but is often misused - https://privateretirementplans.com/

 

  • Charging Orders - The confusing remedy against a debtor's interest in an LLC or partnership is explained in reference to the Uniform Partnership Act, the Uniform Limited Partnership Act, and the Uniform Limited Liability Company Act - https://chargingorder.com/

 

  • California Enforcement of Judgments Law - Considers the topic of judgment enforcement in California, including the California Enforcement of Judgments Law and other laws related to California creditor-debtor issues - https://calejl.com/

 

 

Contact Jay Adkisson:

 

Phone: 702-953-9617     Fax: 877-698-0678     jay [at] jayad.com

 

Unless a dire emergency, please send me an e-mail first in lieu of calling to set up a telephone appointment for a date an time certain.

 

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© 2018 by Jay D. Adkisson. All rights reserved. No part of this website may be copied in whole or in any part without the express written permission of Jay D. Adkisson. Nothing herein is any advertisement or offer by the firm to practice in any jurisdiction where no attorney of the firm is licensed to practice law. This website does not give any legal advice or opinion, and is no substitute for the advice and counsel of an attorney consulted in the relevant jurisdiction. Questions about this website should be directed to jay [at] jayad.com, by phone to 702-953-9617 or by fax to 877-698-0678. This website is http://www.protectedseriesact.com